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Should You Consolidate or Refinance Your Student Loans?

Last updated 03/19/2024 by

Ben Luthi
If you have student loans, getting rid of them ASAP is likely one of your top priorities. Consolidating or refinancing your student loans is a great way to tackle your debt head on.
In this article, you’ll learn about the benefits and drawbacks of each course of action so that you can make an educated decision for your student debt.
When it comes to private student loans, consolidation and refinancing are essentially the same thing. With federal student loans, however, there’s a specific program called Direct Loan Consolidation that isn’t available for private student loans.
To simplify things, we’ll refer to consolidation only as it relates to the Direct Loan Consolidation program, and refer to refinancing as a way to consolidate both private and federal student loans with a private lender.

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Pros and Cons of federal student loan consolidation

Compare the pros and cons to make a better decision.
  • You’ll get access to income-driven repayment plans.
  • You may get a lower monthly payment.
  • It can simplify your monthly payments.
  • You won’t get a lower interest rate.
  • You’ll lose your progress with student loan forgiveness.
  • You may lose other benefits.

The benefits of federal student loan consolidation

If you have federal student loans, there are three main reasons why you would want to consider consolidating them into a Direct Consolidation Loan.

1. You’ll get access to income-driven repayment plans

The Department of Education has four income-driven repayment plans that limit your monthly payments to a small fraction of your income. The catch is that not all federal student loans are eligible, or some are eligible for only one of the four.
With consolidation, you’ll get more access to income-driven repayment plans on the following loan types:
  • Direct PLUS Loans made to parents
  • Subsidized Federal Stafford Loans (from the FFEL program)
  • Unsubsidized Federal Stafford Loans (from the FFEL program)
  • FFEL PLUS Loans made to graduate or professional students
  • FFEL PLUS Loans made to parents
  • FFEL Consolidation Loans that did not repay any PLUS loans made to parents
  • FFEL Consolidation Loans that repaid PLUS loans made to parents
  • Federal Perkins Loans

2. You may get a lower monthly payment

Federal student loans start out on the Standard Repayment Plan, which is a 10-year plan. When you consolidate your student loans, you can extend your repayment period up to 30 years with a graduated consolidation repayment plan — no income-driven repayment plan required. If you’re struggling to keep up with your monthly payments, this can help.

3. It can simplify your monthly payments

Depending on how long you were in school and your financial need, you could have several student loans. “With multiple federal student loans, you run the risk of payment scheduling issues,” says Jamie Wharton from Earnest, a student loan refinancing lender. “When you consolidate your loans, you have just one easy monthly payment.”

The drawbacks to federal student loan consolidation

Consolidation isn’t a perfect choice for everyone, and here are four reasons why.

1. You won’t get a lower interest rate

If you’re consolidating multiple loans, the new loan’s interest rate will be a weighted average of the previous loans, rounded up to the nearest one-eighth percent. In other words, consolidating isn’t going to help you save on interest.

2. You’ll lose your progress with student loan forgiveness

Under the Public Student Loan Forgiveness program, you must make 120 qualifying monthly payments on your loan while working full-time for a qualifying employer. If you consolidate your loans, though, you’ll have to start all over. So, if you’re working toward forgiveness, stick with what you have.

3. You may lose other benefits

If you have Perkins Loans, you may qualify to have some or all of your loans discharged if you meet certain requirements. If you consolidate your loans, though, you’ll lose that benefit.

4. It’s not available for private student loans

If you got your student loans through a private lender, there’s no way to consolidate them with a federal student loan servicer. This means your only option to get a lower interest rate or different repayment period is to refinance them with another private lender.

Pros and Cons of federal student loan refinance

Compare the pros and cons to make a better decision.
  • You can qualify for a lower interest rate.
  • You may get better benefits.
  • It can simplify your monthly payments.
  • Flexible repayment terms.
  • You’ll lose federal benefits.
  • The lowest rates can be tricky.
  • It usually requires great credit and solid income.

The benefits of student loan refinancing

If you have either federal or private student loans, refinancing can be a great way to lower your interest rate, payment, or both. Here are four student loan refinancing benefits to consider.

1. You can qualify for a lower interest rate

Some of the best student loan refinancing lenders offer rock-bottom interest rates for those who qualify. You can choose a variable or fixed rate. Plus, if rates drop again in the future, there’s no limit to how many times you can refinance.

2. You may get better benefits

If you already have private student loans or you don’t need or qualify for any of the federal student loan benefits, you may get better features when you refinance.
For example, some lenders offer a cosigner release, which means you can get someone to cosign on the loan to get you a better interest rate, then request that they be removed later. Just be aware that you must be able to qualify for the loan on your own to make that work.
You may also get access to better deferment and forbearance, which can be handy if you fall on tough financial times.

3. It can simplify your monthly payments

As with federal student loan consolidation, refinancing all your student loans into one can make your life a little less hectic.

4. Flexible repayment terms

The best refinancing lenders offer a variety of repayment terms. For example, you may see five, seven, 10, 15, 20, or 25-year repayment plans. This gives you more control over when your debts will be paid in full.

Drawbacks to student loan refinancing

Every situation is unique, and refinancing isn’t always the best option for everyone. Here are three reasons why.

1. You’ll lose federal benefits

If you refinance federal student loans, you’ll lose all the federal benefits you qualify for with them. For the most part, student loan refinancing lenders don’t offer perks like income-driven repayment, forgiveness, and generous deferment and forbearance policies.
“You should look into the benefits you would lose or gain by consolidating, and whether or not refinancing your loans could make up the difference,” says Wharton.

2. The lowest rates can be tricky

To get the lowest rates when refinancing your student loans, you generally have to go with a variable rate. Although that’s nice to start out with, variable rates can go up or down over time, depending on the market.
There may be some limits in place for how high the interest rate can go, but if you have a long repayment period, you may be better off going with a higher fixed rate.

3. It usually requires great credit and solid income

You have to be in pretty good financial shape to qualify for student loan refinancing, especially if you want the lowest interest rates. If you’re not quite there, it may not be worth applying yet.

Should you consolidate or refinance?

As a quick refresher, here are the scenarios where you should consider consolidating or refinancing your student loans.

When you should consolidate

  • You have federal student loans
  • Public Student Loan Forgiveness or Perkins Loan cancellation are not important to you
  • You want, but don’t have access, to income-driven repayment plans
  • If you would like to simplify your monthly payments
  • You already have a low interest rate

When you should refinance

  • If you have federal or private student loans
  • You don’t need federal student loan benefits
  • If you have solid credit and income
  • You have a high interest rate or want to get a lower one than you currently have
  • If you want flexible repayment options
  • You want to simplify your monthly payments
  • If you can get a cosigner to apply for you to get the best rates
Whether you decide to consolidate or to refinance is up to you, but make sure you consider all the features of each and do the math to determine which is the best course of action. Also, use the information in this article to learn the pros and cons of each.
If you plan to consolidate, you can do so directly with the Department of Education. If you want to refinance, be sure to compare the best lenders, both on interest rates and features, to find the best one for you.
Also, focus on the main goal. To pay down your loans faster, consolidating or refinancing may not be enough. “If you realize you can afford to pay more, up your monthly payment so that you can pay off your debt faster,” says Wharton. Trust us, you’ll thank yourself later.

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Ben Luthi

Ben Luthi is a personal finance writer and a credit cards expert who loves helping consumers and business owners make better financial decisions. His work has been featured in Time, MarketWatch, Yahoo! Finance, U.S. News & World Report, CNBC, Success Magazine, USA Today, The Huffington Post and many more.

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